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Shares of Alcoa (AA), the aluminum producer for the aircraft, automobile, commercial transportation, packaging, construction and energy industry, reported its third quarter results on Tuesday after the close. Shares initially moved up a bit, but are trading with losses of 1% in after-hours trading.

Third Quarter Results

Alcoa reported third quarter revenues of $5.83 billion, down 9.1% on the year. Revenues came under pressure as realized metal prices fell some 17% on the year. The fall in revenues was less severe than anticipated. Analysts estimated Alcoa to generate revenues of $5.66 billion.

The company reported a loss from continuing operations of $143 million, or $0.13 per share. The losses were the result of a $175 million charge, related to environmental remediation of the Grasse River in New York. Excluding the charge, the company reported income from continuing operations of $32 million, or $0.03 per share. The adjusted-profit of $0.03 per share beat analysts consensus, who were looking for Alcoa to break even.

Initially, investors were enthusiastic and sent shares up in after-hours trading, as Alcoa managed to beat on both revenue and earnings estimates. The sentiment reversed after the company lowered its 2012 forecast for global aluminum demand from 7 to 6%, citing a slowdown in China. According to CEO Klaus Kleinfeld:

"Markets seem to be driven more by headlines than fundamentals right now, but Alcoa remains focused on the wings within our control. We're capitalizing on pockets of strong growth and achieving record profitability in our mid and downstream businesses. We're improving performance in the upstream while optimizing our assets, and across the board we're driving productivity gains."

Valuation

Alcoa ended its third quarter with $1.4 billion in cash and equivalents. The company operates with roughly $9.5 billion in short and long term debt, for a sizable net debt position of $8.1 billion.

For the first nine months of 2012, Alcoa generated revenues of $17.8 billion. The company reported a net loss of $95 million, of which $51 million is attributable to shareholders, or $0.05 per share.

Currently, the market values Alcoa at around $9.6 billion. Based on a full year revenue estimate of $24 billion, the market values the firm at 0.4 times annual revenues. Net earnings for the full year are expected to come in around zero.

Currently, Alcoa pays a quarterly dividend of $0.03 per share, for an annual dividend yield of 1.3%.

Investment Thesis

Year to date, shares of Alcoa have risen some 5%. Shares quickly rose to highs of $10.75 in February and have fallen to lows of $8 in July of this year, as investors were fearful about the impact of the global economic slowdown. From that point in time, shares recovered to current levels around $9 per share.

Over the past five years, shares have fallen some 75%. Shares traded as high as $40 in 2008 and fell to lows of $6 in the beginning of 2009. Shares have recovered to $17 in the beginning of 2011, but since that point in time have lost 50% of their value again.

Between 2008 and 2012, Alcoa saw its revenues fall from $26.9 billion to an expected $24 billion. The company reported losses in 2008 and 2009, followed by modest profits in 2010 and 2011. Shareholders have seen significant dilution over the time period, as the number of shares outstanding rose 40%.

The latest report brings little news to investors. The company remains heavily dependent on global aluminum prices. While Alcoa managed to squeeze out a small operating profit, the company reported a big net loss. Alcoa is once again hurt by its operating legacy, as the company took at $175 million environmental related charge. Year in year out, the income statement gets impacted by "one-time" charges, making them really "recurring" expenses.

Besides dismal profitability, the company is also carrying along a massive net debt position of over $8 billion. I remain very pessimistic about the long term prospects for investors in Alcoa. The company simply does not succeed in creating a sustainable competitive advantage, accompanied by sustainable profits. Return on its invested capital base has been dismal for years. Serious investors should stay away.

Source: Alcoa: No Serious Investment Opportunity Amidst Weak Operating Profitability, Massive Debt